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Tuesday, March 16, 2010

Hot Water Heater: Rent vs. Buy

Two Saturdays ago, I got up to find that hot water was shooting out the top of my hot water heater. This forced my hand on the decision of whether to replace my 20-year old hot water heater with another rental from Direct Energy or buy one.

In the face of water gushing onto my basement floor, I took the following steps:

1. Panic. This is best limited to a few seconds during which you don’t move.

2. Shut off main water supply to the house. Every adult and teenager in the house should know where this is, and it should be kept clear.

3. Clean up the water. A plastic dustpan worked great for scooping up the water off the cement floor that pooled away from the drain.

4. Call a friend who knows how to do just about any kind of work around a house and is often available on short notice. This step could be tricky if you don’t have the right friends. I do my best to be helpful to my friends, and they tend to reciprocate when I’m in need.

5. Buy and install a new water heater.

I had been planning to buy a new water heater for some time because the old one produced a lot of rusty hot water, and the $15.21 (including tax) I pay in rental fees each month irritates me. My punishment for procrastinating was the somewhat flooded basement.

I went for the longest warranty (12 years) at Home Depot, and the new water heater cost $711 (including sales taxes). At $15.21 per month, the new heater will pay for itself in 47 months, or about 4 years. This analysis leaves out a few factors:

1. Water heater rental costs go up over time. In fact, my rental cost had just increased by about 11%.

2. The water heater purchase had to be paid up front, but monthly rental costs are in the future.

3. Any repairs would be covered on a rental. The exact coverage on my 12-year warranty is uncertain. You never really know what costs are covered (such as parts and labour) until you try to make a warranty claim.

Factors 1 and 2 roughly offset each other, but the potential need for repairs changes the equation. Let’s say that if my new heater is problem-free for at least 4 years, then I will come out ahead. If not, then it will take longer to get to the break-even point. However, I’m confident that I’ll come out ahead in the long run.

37 comments:

I faced a similar decision a couple of years ago, although fortunately my choice wasn't precipitated by water firing out of my aging water heater. One question I had was whether the water heater rental company would install a quality unit or if they would simply install the lowest cost item. My suspicion is the latter, although I don't have any evidence to support that view. If the water heater you purchased is a better unit (i.e. higher efficiency) than the unit that a rental company would be likely to install, then you'll make up you costs even more quickly through reduced gas consumption. Additionally, the unit will probably be more reliable (although 20 years service before expiring is pretty good).

Michael: The rental companies seem to charge different rates for different types of heaters. So, they wouldn't necessarily just put in the cheapest water heater. No doubt my new water heater is more efficient than the old one, but a new rental would be more efficient too. So, I didn't involve efficiency in my analysis.

I didn't realize that the rental companies charged different rates for different tanks (other than perhaps based on size). It would be interesting to know whether they charge a higher margin for more desirable (i.e. efficient) tanks or if they are simply trying to make a fixed margin over their cost (which would presumably be somewhat higher for a more efficient tank). My original point was not targeted at the efficiency gain over the old tank, which I assumed would be better for both the rental and the purchase. The relevant assessment is between the type of unit you can purchase versus the type of unit you can rent and the relative efficiencies of those units. If you can only rent a relatively inefficient unit then you save more by using less gas. If you can rent a unit with the same level of efficiency, but have to pay a higher rental margin for that improved efficiency, then you presumably pay less for your gas savings. Admittedly, when water is firing out of your tank these are perhaps fine distinctions.

Michael James: What was the installation cost? (I guess you and your handy friend did it yourselves?) When our tank (or more properly, our landlord's tank) blew, it took the guys almost 2 hours to install it because they had to install a new venting system.

Michael: my understanding is that direct energy only installs decent quality, new, high-efficiency tanks, and you just pick your tank size. Haven't called to confirm recently though. I do know that tankless is also an option.

Right now we rent our tank, because that's what our landlord decided to pick...

I see it as being like insurance: if you can afford to self-insure against the risk of your tank breaking down early, then you'll most likely come out on top by owning it yourself. Over the long term it'll cost you a little more to rent, but if it gives you peace of mind (or if you can pass the cost on to your tenants) then it's not that much more...

Even though it costs us a bit more to rent (since the landlord passes the cost on to us), it is kind of nice to believe that Direct Energy would come out on short notice to fix it if there was a problem... the last landlord took 2-3 days to get the new tank installed. That's not very long in absolute terms, but was two sponge baths from a kettle too many.

Of course, if we were handy and had full responsibility, we'd opt to own the tank.

Potato: We did the installation ourselves. It was pretty easy because I had someone who knew what he was doing.

Elia: I didn't go for a delayed payment (not that Home Depot said I could). As long as you can keep track, these deals can be good, but if you're late paying, they often hit you with high interest all the way back to the purchase date (I'm told).

We have been very irritated by our water heater rental bill as well. It seems like they have been raising the rate at least twice a year. It was about $19/month when we built our home in 2003 and it's now $25/month.

We have avoided getting a new one because this one's not that old, and the newer ones seemed to cost around $1000 or so. It did need some repairs a couple of years ago, and it was a relief not to have to pay for them. Still - $25/month? Can they just keep raising the rate whenever they feel like it?

2 Cents: I don't know what rules if any govern increases in rental rates on water heaters. I'm happy to avoid regular rental payments and pay for a new water heater (or repairs) whenever it becomes necessary.

Any difference in efficiency for a hot water heater can easily be offset with a very cheap solution. For around $30 you can buy a blanket to insulate your tank. Or, there are raw materials out there you can buy and make your own.

I just rent mine and had DE replace it a few years ago for a new one when the water was looking rusty. If I cared enough to save $$ I can turn down the temperature and insulate. This is the same thing you do for your house.

The old rule of rent things that depreciate applies here. Unlike your home, the hot water tank will only depreciate.

I recently bought a house in November of 2009. The water heater that was installed was a rental from direct energy and was installed in 1989!!! In doing my research I realized that if you have a rental water heater that is older than 15 years, you should buy it from the rental company. I will give you an example.

Direct Energy states on their website (http://residential.directenergy.com/EN/Home-Services/ontario/Documents/2009_water_heater_buy-out_schedule.pdf) that if your hot water tank is 15 years or older, no matter how many liters or what type it is, you can buy it from them and cancel your rental agreement for $100. What does this mean? It means that you keep the exact same hot water heater installed and running, but you don’t pay your average $20 a month in rental costs. You do however become reliable for any problems that arise. So if you were paying $20 a month in rental costs and you go problem free for 5 months (100/20) you come out ahead.

You then must ask yourself why would people ever rent their hot water heater. The most obvious answer is that they like the safety that if something goes wrong, the company will come and fix it with no charge. So now what do you do if 3 years after you bought out your water heater, it goes bust. Well you simply call up the company you bought it out from, tell them you would like to sign back on as a rental, and they will come and install a new tank free of charge. The one downside is that your monthly costs would be slightly higher since you’re a new customer, the upside however would be that you got a brand new tank for no money upfront and slightly higher monthly bill… that you obviously will buy out when it gets back to 15 years old.

Please spread the word on these buyouts. The companies don’t advertise this feature because it’s negative for them if you go this route. Hope this post helps a few!

Patrick: The buy-out route is a good one for some people who plan to keep the water heater. However, if you're planning to replace it anyway, you're better off doing so without paying the buyout fee. BTW, I saw the buyout schedule on the Direct Energy web site.

@2 Cents: You can always buy-back the tank which is installed in you house. Just call the company you're renting from and ask for the price. It should be cheaper than a new one, and you'll have no installation costs. For my 12 years old tank, the rent was $11, and the price was $90. I'm already ahead some $$$. Not a big deal, but for 5 minutes on the phone...

Michael, if you and your friend did the installation yourselves I hope one of you has a gas license (assuming your new unit is gas-fired). Should your house blow up due to "faulty installation" (i.e. leaking gas) of the water heater then your insurance company may decline to pay you any benefits.

unless you can fix it, dont bother. I see it all the time as an HVAC mech, people buying water heaters just for the ventor motor or control to go 2 years later. $500+ repair. My parents have a water heater they rent and the main controler just went, only 2 years old..it was fixed for free but my mom was thinking of buying one just 3 months ago..although I could of fixed it for pretty cheap (just parts) most cant.

My less than 2 year old GE Power Vent gas water heater broke down today. Sure the 6 year warranty covers the parts, but not the service, which today was $135(Holiday/weekend rate) for a service call to diagnose the problem. The ignition assembly failed and while GE will send out a replacement, it will take nearly a week for the part to come in. Then it will be another $100 for service call plus $109/hour for labour. A family of 5 can't be without hot water for a week, so after years of good luck owning, tomorrow I will become a renter. Apparently the power vent tanks have a short life expectancy, so I'm going to cut my losses.

Anonymous: It's too bad that you had bad luck with your water heater. However, this outcome can't be typical. Companies that rent out water heaters are in business to make money. Choosing to rent vs. buy is like paying for a type of insurance. I only insure against problems whose costs would be so high that it would negatively affect my life. I see no reason to insure against a potential loss in the hundreds of dollars.

Before you make the wrong decision, hear about my experience in buying a hot water heater.Four years ago I was biulding a new house and after doing my math (monthly rental costs vs. purchase cost) I decided to buy a high-efficiency Rheem gas water heater at $860.00 (plus taxes) from Home Depot. Just this week (a couple months less than 4 years), the thermostat is gone (no hot water etc.) and of course the warranty covers the tank for 6 years but only one year the thermostat. So I called Direct Energy for repairs. The service call alone (that is just to come and look at the problem) costs me $100.00 and the technician says that I need a new thermostat at a cost of $499.99 plus $100.00 labour to install it. By the time I have the heater working again I will have dished out another $700.00 plus 13% taxes. Looking at buying or renting, how does that look now? If I had known four years ago what I know now I would have chosen Renting the heater. If I spend another $700.00+ now, I have no guarantee that something else will not break in a month or two at an additional cost. I am better off renting, it will probably cost more or less the same than buying but I will not have any more surprises!! Sure the math looks always good on paper, but in the real (new) world where everything is made cheaper and cheaper, that math does not apply any longer.

@Anonymous: Are you sure you would have been better off renting even taking into account that you essentially have to replace your heater after 4 years? My guess is that it comes out fairly close. Combine this with the fact that you obviously had bad luck and I'd still prefer to own rather than rent.

I never like renting a product that continues to stay in my home year after year. With a unit that was installed (new) November 2007, I'm investigating whether it would be wise to buy out the tank for $1084.

@Seven24: I feel the same way you do about renting indefinitely. You should check out the cost of a new water heater before buying out your existing one. I paid closer to $700, but perhaps the one I bought isn't as good as yours. The last I checked, tankless water heaters were quite expensive, but their prices may come down over time.

Don't forget ... if you are renting and choose to buy your own tank rather than buying out the existing one, you have to pay Direct Energy to come and remove the rental. Last time I looked that was over $200.

Renting a hot water tank from anybody is no guarantee that any needed repairs will be done promptly. After my 14 year old tank sprung a leak and did considerable damage to my basement, it took Direct Energy more than three days to have it replaced. Because I didn't own the tank, I couldn't elect to have somebody else come and fix it faster. Being without hot water for three days and without showers or baths is no fun and I was offered no compensation for my trouble.

If Direct Energy was smart they should have replaced that tank when it was 15 years old as preventative maintenance since 15 years is considered the 'End of reliable life' of any hot water tank. This would have prevented you from the flooded basement which could have done much more damage.

I'm in Ontario, Canada and found myself in a similar situation. I used to have a rental - 40 gallon gravity vented tank. When this reached the end of it's lifecycle, my rental company wouldn't replace it until I installed a proper liner for the chimney. This means tin within the chimney apparently. I also looked into doing this myself. For the cost of the rental vs the cost of the purchase (including the liner which is required by code and you must have someone with a TSSA # to install it (gas)) it was prudent to continue with a rental. I opted for a power-vented hot water tank, which come with their fair share of problems - IE DC blower motors are notorious for dying early and cost lots to replace. In my opinion, I pick up a phone and someone arrives next day to fix. On a purchase I know for a fact blower motors aren't covered for this very reason, they're plain crap and as such that's where the money grab is.

tJust switched hot water heater rental company yesterday and have had no hot water since. Have called the company twice and was given tomorrow time slot of 1-5 Pm. However if I wait for a phone call they may get to us today if they have a cancellation. 3 days of my life volunteering to wait for hot water is too much stress in my life. think we should purchase and tell them to take it out. enough even

My family of 4 have been making use of a 40 gal., direct-vent, gas water heater( 'Gulfstream' ) for the past 23 yrs. without a single problem in all that time.. There was a rental electric unit in the house when we purchased it in '88.When we switched from oil furnace to gas a couple yrs. later, we also updatedto a gas water heater as well ......also a rental . We eventually bought out the rental contact a few yrs. ago ($ 30 dollars as I recall ) .Our monthly charge while renting was approx. $12 / mo. Had we been renting all that time, I think we would have spent approx. $3000.in rental fees. Now ... I suspect we were just very fortunate with the reliability of this unit but we are now about to replace it .....time and hard water residue havedecreased its efficiency. No big suprise after all that time ! Let me just say that I hait renting anything but I know repair and service fees have gone thru the roof and the chances of us ' lucking out ' again with a new heater are slim. To rent or purchsase ? I 'm still not sure which way to go but time is runningout and I need to make a decision soon. To be honest, I'm kind of leaning toward another rental and let the gas company assume resposibility for the maintanance expenses. An extra $20 dollars a month on my gas bill , I can budget for. It's about the same cost of one movie theatre ticket and box of stale popcorn. The possible sudden expense of a $ 100. service charge plus repair bill, however,would not be as easily absorbed.

@Anonymous: Why not just save up a few hundred dollars as an emergency fund? The cost of a hot water tank plus a couple of service calls is small compared to years of rental charges. You'd end up saving far more than the amount in you emergency fund.

I've thought of that but other factors need to be considered when buying. For instance......- what make of unit now is most reliable, affordable and isn't made in china?- where and with whom do you deal with ?- honest and reliable retailers are a rare commodity any more. They all love to take your money and promise good customer service but ,more often than not, when problems arise that smiling, cordial, helpfull sales person suddenly no longer works there or doesn't remember your face ( and does'nt want to remember your face if it cuts into his profits.)Sure you may have it in writing but if they decied to dodge responsibility for the repair and drag things out, what timely recourse do you have....one thats going to get hot water flowing quickly. Seems to me, if they (the gas company) are resposible for the maintenance of a rental tank, its to their avantage to provide you with a reliable unit .....one requiring less free service calls for them....maybe...or maybe not ?Just some thoughts.

@Anonymous: That sounds like a bunch of FUD. Who do you work for? Paying $200-$300 per year to rent a hot-water heater you can buy for only $700 just doesn't make sense. Even if you end up replacing it within a decade you're much farther ahead buying.

We just bought ours a few months ago. It's 10 years old. The buyout price drops every year. Like someone said (above), the rental companies are in business to make money, so you would think they would install a unit that would be reliable and reduced service calls that are a cost to them.I've also heard the comment "It's just a tank." i.e. a fairly simple piece of equipment, implying less chance of failure.Mind you, we have a natural vented unit with no power vent motor to fail, so we're likely paying more due to inefficiency anyway.

BTW, the extra chimney liner is to make the opening smaller. Newer tanks are more efficient (even natural vent vs. natural vent), so there isn't enough waste heat in the exhaust to push the flue gases all the way up a large pipe. Therefore you need a narrower chimney.

Also, putting a blanket around the tank will not make the unit more efficient per se. The efficiency is a measure of how much energy from the gas goes into the water vs. how much goes up the chimney; not how much heat the unit loses after the water is heated.

I had a DE tech come out to check out the tank (coincidentally just before I decided it was in good shape to buy out....) and he pointed out that if the tank didn't feel warm to the touch, then it must not be losing (giving off) heat, and an insulating blanket wouldn't have any effect. I understand the logic, but it's hard to resist wanting to wrap it up anyway...

I'm thinking that when the kids get older and take their own showers, being at risk of running out of hot water will just be extra incentive not to waste energy, no? I'll have to remember to get up first...